Should Private Equity Teams Let Go of Their Weakest Performers?

I was with a client a few days ago when an almost unheard of phrase was uttered ‘I wonder if we should let go of our weakest performers on a regular basis?’.

Private equity, as an industry, hasn’t really addressed the issue of poor performance in a consistent way. Yes, there are some exceptions, but I’m confident they’re in the minority. There’s a lot standing in the way of facing up to this: it isn’t easy to do, it isn’t pleasant to do and anyway if you ignore it long enough or make it uncomfortable enough for those you ‘suspect’ are the weakest – well maybe they’ll leave of their own accord.

I know, why not downgrade their bonus and they’ll get the message and it’ll sort itself out.

Well, get real! It won’t sort itself out. And what is worse, one of the biggest costs of not tackling poor performance is that it’s not the poor performers that will leave – it’s your star performers.

Going right back to my previous note on candidate appeal – the best people will be attracted by organisations staffed by stars. Good people thrive on the stimulation of working with other high performers. And conversely they’re likely to leave businesses where weaker performance is tolerated.

Everyone’s heard of the GE philosophy of ranking all their people and firing the bottom 10%. It may sound tough but high achievers applaud it.

The three lessons for private equity here are

• Objective performance measures need to be determined and applied consistently
• A regular timetable of appraisal, promotion and termination needs to be put in place and adhered to
• A culture that expects and values this needs to be created.

My experience of private equity bloodletting is that it is usually a knee jerk reaction in response to an external stimulus of some sort: a poor investment, economic circumstances, internal disagreement or at carry allocation time when dividing the pot between fewer people seems attractive to the managers. If you want to take the first step towards a more effective system then you need to be able to rank your people objectively, not just by gut feel. So start off by determining the qualities that you want to see and working out how you can measure them.

There are many HR outsourcing services you can use to help you in this. We can put you in touch with a few if you need a steer. You’ll probably find that your gut feel produced the same rankings as your objective system – but you now have a base from which you can build a sustainable model of refreshing your team from below and retaining and attracting high achievers at the top. Further success for your business will surely follow.